With consumer prices falling more quickly and more broadly than expected across the United States, economists said retailers must be slashing prices as consumers spend less and save more. The rapid decline of energy prices plays a major role in the falling figures, but the core rate saw its first negative monthly print since 1982, suggesting that prices are in broad-based decline.
The seasonally adjusted U.S. Consumer Price Index saw its biggest monthly drop ever with a full percentage point drop in the all-items index for October, while core inflation fell 0.1% against expectations of a slight gain, according to the U.S. Labor Department on Wednesday.
Ian Shepherdson, chief U.S. economist at HFE, said the report "clearly reflects the crunch in discretionary consumers' spending, which is likely to persist for the foreseeable future."
He noted that the 14.2% decrease in gasoline prices was actually a smaller drop than anticipated, which implies there should be an even bigger decline in the November index.
Still, senior U.S. economist Paul Ashworth at Capital Economics said the collapse in commodity prices is having a dramatic effect on inflation. "The continued steep decline in gasoline prices, along with some very favourable base effects, means that headline inflation will plummet to slightly less than 2% in November," he said.
Ashworth said headline inflation "is almost guaranteed to turn negative next year." He added that the real surprise was the negative print in core prices, which may not be beneficial going forward.
"We had hoped that core inflation would remain firmly in positive territory, at least next year, making a slide into a pernicious debt-deflation spiral less likely. However, seeing these figures, we're not so sure."
The annual core rate, which excludes volatile food and energy components, was pushed down three-tenths to 2.2%, just above the Fed's unofficial target rate of 2.0%.
The market reaction to the release was minimal, said Sireen Hajj, associate at Calyon. "The October CPI figures were lower than market expectation and were simultaneously released with weak housing starts data. However, market reaction to the figures was mixed with bond prices moving lower on balance following the release. The currency market impact was relatively muted."
The CPI report follows the release of producer prices on Tuesday, which fell by 2.8% in October, a record drop in the 61-year index. Economists said the report confirms that inflation is off the radar, but some are worried that such declines could create deflationary pressures in the medium term. As for the Fed's response, economists said they should have the green light to cut rates if warranted.
By Patrick McGee and edited by Sarah Sussman
©CEP News Ltd. 2008